Covance beats estimates with Q1 income, revenues

US-based drug development services company Covance beat its own and analysts’ estimates for revenues and earnings in the first quarter of 2011.

Net revenues for the three months ended 31 March 2011 came in at US$502.0 million, 4.2% more than in the first quarter of 2010 and above the average analyst forecast of US$496 million.

Reporting its fourth-quarter and annual results for 2010 last January, Covance had predicted a “slight increase” in net revenues for the first quarter of 2011 against Q4 2010, largely reflecting higher levels of business under the company’s strategic alliance with sanofi-aventis.

Net revenues for the fourth quarter of 2010 were US$491.5 million, so the US$502.0 million for the latest quarter was in line with projections.

Operating income in the first quarter fell by 20.7% year on year to US$41.9 million, with the decline exacerbated by US$5.9 million in costs from previously announced restructuring initiatives. Of the total costs, US$2.9 million were charged to Covance’s Early Development segment, US$1.0 million to Late-Stage Development and US$2.0 million to corporate expenses.

The restructuring charge shaved US$0.06 off diluted earnings per share (EPS), which were down by 10.9% year on year at US$0.54.

Stripping out the restructuring costs brought Q1 diluted EPS up to US$0.60 – flat against the first quarter of 2010, ahead of the analyst consensus of US$0.58 per share, and above the top end of Covance’s own targeted pro-forma earnings range (US$0.56 to US$0.59) for Q1 2011.

Early/Late Development

Early Development revenues in the latest quarter were 9.3% higher at US$224.0 million, while operating income improved by 2.9% over the first quarter of 2010, to US$23.6 million. Income would have been 15.6% ahead without the restructuring costs.

According to Covance, the revenue growth was driven by the addition of Early Development sites at Alnwick, UK and Porcheville, France, as well as gains in North American toxicology (excluding the Vienna, Virginia site, whose services have been transferred to Greenfield, US), chemistry, and discovery support services.

On a sequential basis, improved profitability in toxicology was offset by higher operating losses associated with the wind-down of the Vienna operations and the transition to Greenfield, as well as higher incentive compensation accruals and lower levels of operating income in chemistry and discovery support services, Covance said.

In the Late-Stage Development segment, net revenues inched up 0.4% to US$278.0 million and operating income dropped by 16.6% against the first quarter of 2010, to US$55.2 million. Taking out the restructuring costs reduced the year-on-year decline in operating income to 15.2%.

On a quarter to quarter basis, net revenues increased by US$7.0 million as growth in clinical development services was partly offset by falling revenues from central laboratories, Covance noted. It blamed the squeeze on profitability in Late-Stage Development mainly on lower revenues and operating income in the central labs business.

Increasing demand

Adjusted net orders for the latest quarter totalled US$564 million, giving an adjusted book-to-bill ratio of 1.12 to 1. Backlog as of 31 March 2011 was US$6.29 million, compared with US$4.79 billion at 31 March 2010 and US$6.19 billion at the end of last year.

“As evidence of our success in strategic partnering, nearly 20% of our revenue in the first quarter was earned from contractual minimum volume commitments,” Covance commented. “Looking forward, we are encouraged by the increasing demand for our toxicology services, as well as a robust pipeline of clinical development proposals.”

The company is still projecting revenue growth in the single digits for the whole of 2011 and pro forma earnings per diluted share in the range of US$2.50 to US$2.90, excluding costs associated with ongoing restructuring activities. The current analyst consensus for full-year EPS is US$2.73.

In the second quarter, Covance is looking for “a continued sequential increase” in net revenues and pro forma earnings per share of around US$0.65.